12. What is Option Panda’s option underwriting mechanism?
As Option Panda operates in a decentralized environment, it pools real underlying asset as collateral to guarantee option underwriting. Option sellers’ only way to participate is by depositing a specific asset to either a Call/Put underwriting pool to join a pooled option underwriting for that very asset; option buyers could purchase a call/put option with any stable coin(initially only USDT is supported). This is unconventional compared to traditional option market, where buyers/sellers offer their bid/ask prices for a certain strike price and expiry date respectively. Option Panda’s underwriting pool generates and retires options regularly. To avoid concentration and liquidity risk of the underwriting pool, Option Panda evenly allocate the pool’s available funds across options with different expiry dates and sets up a utilization ratio upper bound of 75% for the pool, which means that at most 75% of the pool could be utilized for option underwriting. Concerning settlement, Option Panda employs a combination of cash settlement and physical delivery of profit to option buyers(Option profit will be settled in cash but delivered in underlying physical asset). Five available expiry durations, 5 minutes, 15 minutes, 30 minutes, 45 minutes and 1 hour, will be offered at Option Panda’s initial launch.
Option Panda adopts an auction-like option offering mechanism. Every cycle, after the old option expires, new option with the same expiry duration will be generated with a fixed offering amount. This offering amount is calculated based on the availability of underwriting pool at that moment. Buyers are able to purchase the option until the upper limit is hit.
| Put | Call |
Underwriting Pool | USDT | BTCB/ETH/BNB |
Utilization Ratio | No more than 75% | No more than 75% |
Option price paid | In USDT | In USDT |
Profit paid to buyer | In USDT | In BTCB/ETH/BNB |
Expiry Dates | 5min, 15min, 30min, 45min, 1hour | 5min, 15min, 30min, 45min, 1hour |
If the time clock is an integer multiple of an option’s expiry duration, the old option will expire and settle; new option of the same expiry duration will be issued. This process will go on and on, auto updated by smart contract.
To summarize:
- 5 min expiry date options updates every 5 minutes;
- 15 min expiry date options updates every 15 minutes;
- 30 min expiry date options updates every 30 minutes;
- 45 min expiry date options updates every 45 minute;
- 1 hour expiry date options updates every 1 hour;
“update” is equivalent to “retire old and generate new” options
An illustration of the schedule of periodic option issuance and retirement is like the following:
Therefore, as you can see, Option Panda is more analogous to Binance Option, except that it is totally decentralized, with a transparent option pricing mechanism.